‘Smart investors’ avoid these 8 common investing traps and mind games that Alan Kohler warns about. ‘Intelligent investors’ use Benjamin Graham and Warren Buffett strategies.
We’ll dive into how you can be both as you start your investing journey. But before you do there are some little barriers you need to be aware of.
Barriers to investing
We’ve seen in previous BiG Challenge posts how psychology has a role in investing and some of the many reasons why many people put it off. It involves money, emotion charged at any time; so too financial concepts, numbers, maths and statistics that many people avoid – or say they’re just ‘not good at’. The sheer volume of new information and concepts to learn, combined with the pressure of not wanting to make a bad investment, lose money and impact on your or your family’s future – can cause fear and play on your mind.
- Blame it on the finance nerds and the media
Often the finance industry and media don’t help – apart from some with a sense of humour and who can explain the many complex issues in simple terms. Such as Alan Kohler’s witty, yet relatable finance reports and graphs on the ABC; Scott Pape’s laid back style and easy to understand investing articles, blueprints and media appearances; and the down to earth, consumer friendly approaches by David Koch, Ross Greenwood, Paul Clithero and others.
Many still find business and finance dry and uber serious. Finance ‘nerds’ giving sombre often unintelligible analysis, live updates of the latest index rise and fall or whether gold or Guatemalan goose feathers have gone up or down!
Unless you’re in a business where daily fluctuations matter, you may be share trading, buying on market rises and falls – do you need to fill your already overwhelmed investing head with this information? Does it really impact on your busy day to day lives and decisions?
- Not so female friendly
Little wonder too that many, especially many of my female friends and acquaintances, have little or no interest in investing – or just give up.
With the exceptions of small business and property investing, where investing is often less intimidating, more straight forward and creative. See some women and investing material in Wealth Strategies and Topics
.But investing education and advice is gradually improving as consumers demand it be clearer, simpler and more tailored.
Gradually too traditionally male dominated business, finance, legal, and political systems are becoming more inclusive and addressing some of the inequities. In particular the inequality women face with superannuation – live longer, retire with less.
I am largely concerned that we are pushing women away from super, especially if the current system is forcing them to turn away, or turn off completely.
So while the current median super balance of men aged 35 to 44 is around $41,000, for women of the same age it’s $22,600.
For those about to retire – 55-64 year olds – men have a median $91,000 compared to women with $55,000.
Mark Bouris in various articles in Wealth Creation Strategies and Topics
More too in BiG’s Investing in Yourself
How can you be a smart investor?
You can be an intelligent investor and a smart investor too. Especially if, as Alan Kohler suggests, you keep your own investing beliefs anchored in realty and not wishful thinking … and avoid these traps investors commonly fall into:
- Anchoring – Anchoring investment beliefs in information or events that no longer apply (eg buying last year’s best performing asset class in the belief past returns will be repeated)
- Availability – Basing decisions on availability without checking alternative sources (eg property investors buying in their local area)
- The certainty effect – Investors and markets hate uncertainty – preferring small certain gains to a larger uncertain one (eg GFC rush to gov. guaranteed deposits, despite low returns, so missed out on profitable early stages of share market recovery)
- Confirmation bias – Looking for information that confirms beliefs, ignoring anything contradictory (eg final stages of a bubble, people believe commentators who say rise will continue, despite price not reflecting true value)
- Framing – Reaching a conclusion based on the framework in which it’s presented (eg invest $10k, increases to $12k. Think risk is only $10k, in fact it’s $12k. Think if drops to $11k – still ahead, in reality $12k at risk. Constantly re-evaluate based on current reality)
- Magical thinking – Erroneous belief that certain behaviour leads to desired effect [in reality no causal connection]
- Regret avoidance – Avoid actions that confirm you’ve made a mistake (eg avoiding crystallising losses)
- Representativeness – The danger of investing based on stereotypes (eg if decide company/management are hopeless due to losses, fail to acknowledge evidence of a profitability turnaround)
adapted from Alan Kohler’s Eureka Report – Guide to Personal Investing (and Barbara Drury)
How can you be an intelligent investor?
Benjamin Graham’s 1949 book The Intelligent Investor and the idea of being an ‘intelligent investor’ is followed my many stock market analysts. One of world’s most famous and successful investors Warren Buffett, the ‘Oracle of Omaha’ uses its principles.
There are endless official and unofficial – books, publications, websites, commentators and advisers that dissect or claim to have found the essence of intelligent investing, or the ‘Buffett way’, Buffett’s ‘secrets’. Unlikely to be any secrets, given he shares his advice and thoughts freely in his letters to shareholders and elsewhere.
Perhaps the secret to his success is that he invests like a woman?
The quickest, perhaps best way to become an intelligent investor is to follow, or get advice from one of the many who’ve studied and applied the principles of value investing.
Apart from getting a general understanding, why not leave the intellectual rigour and analysis to them? For example Scott Pape, The Barefoot Investor, who is an unashamed devotee.
So – good luck working on any barriers that may be stopping you investing, using the intelligent investing principles that appeal to you, and avoiding investing mind traps.
And don’t worry.
Spend a bit of time educating yourself using BiG’s resources and you’re on your way to becoming a smart and intelligent investor.
Love to get your feedback – email or leave a comment.
I’d also be delighted if you find BiG and my work helpful, and share it with friends, family and others who want to build on their investments. Subscribe and be part of the Challenge and receive BiG’s free news updates.
All the very best with life and your investing.
Day 25 BiG 30Day Investing Challenge| Time to invest – just do it! Step 4 Build your own investing plan and strategy.
Day 26 BiG 30Day Investing Challenge| Time to invest – just do it! Step 5 Time to shop – for your investments! Day 27-28 W/E
Where we’ve been – 30 Day Challenge Blog overview:
Day 2 – Where the Bloody Hell Are You?! Assessing your current financial situation
Day 3 – The Lazy Investor’s Way to Set Goals
Day 4 – Spoilt for Choice! The Many Types of Investments and Strategies Available to You – the Investor!
Day 5 – Who Can You Turn to for Investing Help? People and ‘Players’ in the Investment Industry (Day 7-8 Review and reflect)
Day 9 – How to choose a financial adviser and advice you can trust. It’s all about the faith! Part 1 Financial planners
Day 10 – Part 2 Rate the Raters! Investing Rating sites, Top 10…, Best…
Day 11 – Part 3 The Investing Information Tsunami! Media, Books, Magazines, Websites, Blogs, Podcasts, Webinars…
Day 12 – Part 4 Less Regulated Advisers – Analysts, Commentators and Gurus (Day 13-14 Review and reflect)
Day 15 – Part 4 Less Regulated Advisers… Gurus
Day 16 BiG 30Day Investing Challenge| Who are the best investment gurus? Part 1| Avoid some Gurus
Day 17 – Who are the best investment gurus? Part 2| Find a Guru
Day 18 – Who are the best investment gurus? Part 3| Rate a Guru
Day 19 – Who are the best investment gurus? Part 4| Choose a Guru (Day 20-21 Review and reflect)
Day 22 BiG 30Day Investing Challenge| Time to invest – just do it! Step 1 Use Neuroscience and Psychology – Investing Hope to Reality
Day 23 BiG 30Day Investing Challenge| Time to invest – just do it! Step 2 Choose your investing team – or do it yourself investing.